Are you looking to buy a new or second hand car? Don’t have enough cash? Then you are most likely looking at other ways to finance your purchase such as a car loan. The following tips are basically key elements that will help you get approved for car finance, these elements are not isolated from each other, they all pay a role in the overall formula:
There more money you put down as a deposit, the less you will have to borrow and the less you will have to pay back. If you can afford 25% of the value of your vehicle, your chances of being approved for car finance are significantly high. Needless to say it will also depend if you are buying a new or second hand vehicle and what the resale value of that car might be.
Your credit rating is probably going to be the most important piece of information that lenders will look at which will help them determine whether you are eligible for a car loan or not. In the UK your credit score goes from 0 to 1000 and falls into the following categories:
Very poor: 0 – 560
Poor: 561 – 720
Fair: 721 – 880
Good: 881 – 960
Excellent: 961 – 999
There are many factors which help determine your credit score, such as if you are on the electoral roll, if you have lived at a permanent address for more than 3 years, if you have any outstanding debts or defaulted on any payments, how frequently you have applied for loans and if you have been rejected or not, and many others. Generally speaking the more stable you are financially, and more credit card bills or loans that you pay off in time will help boost your credit rating.
The amount borrowed is of course one of the main factors which can make or break your application for a car loan. It isn’t as straightforward as it seems, it’s not just a case of ‘the less borrow, the more likely you will get approved’. Car finance brokers are looking to make money and profits, so they aren’t particularly focused on lending small amounts and charging low interest rates. Ideally they would like to be in a position where they can lend large amounts as this will generate more profits for them!
There are other elements that they will take into account when looking to finance your car, such as your credit rating and history, the amount you choose to borrow, how much deposit can you provide, the time-span you plan to pay it back in, and needless to say which car you choose to purchase. All of these elements play a role in their risk and profitability formulas that lenders will use to determine if you are eligible or not.
If you’re looking to borrow larger amounts, you must be in a position to provide a decent deposit (over 10% of vehicle cost), have a clean credit history and be purchasing a car which offers good re-sale commerciality. Lenders look into the re-sale value of a vehicle in case they have to repossess the car and sell it at auctions or elsewhere to gain their money back.
Value of the Car
The value of the car you plan on purchasing will have a significant importance on the outcome of your finance application. Lenders usually appreciate capital protection when lending money to someone who plans to buy goods such as cars, as it guarantees them some security in case you fail to make the repayments.
They don’t just take into account the value of your desired vehicle, needless to say, the other factors such as your initial deposit, credit history and monthly repayments will play a big role in determining your outcome.
For example, if you are looking to buy a brand new Mini Cooper, which has a strong market value and is popular by demand, and you have a 25% deposit, the chances of getting car finance will be pretty good. On the flipside, if you are looking to buy a second hand, unpopular car model (lets say a Hyundai Atos for example), and you have less than 10% deposit, lenders aren’t going to be so willing to finance that purchase as it offers them less security.
This article was written by Ross Kelly who works on the editorial team for Car Loan 4U – UK’s Leading New and Used Car Finance Provider.